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Ask Matt: Bail on emerging markets due to Russia?

Q: Should I bail on emerging markets due to Russia sanctions? A4: The battle over Crimea is making investors nervous about their emerging markets holdings. But savvy investors know that this political event

Ask Matt: Bail on emerging markets due to Russia?

Russian Prime Minister Dmitry Medvedev attends a wreath laying ceremony as Russian Marines with Russian national and Russian Navy flags march in front of him at the World War II memorial in Sevastopol, during his visit to Crimea.(Photo: Alexander Astafyev, AP)

A: The battle over Crimea is making investors nervous about their emerging markets holdings. But savvy investors know this political event isn't enough to make them bail out of the important asset class.

It's been a do-nothing start of the year for emerging markets. The Vanguard Emerging Markets Stock exchange-traded fund is down 1%. Even so, emerging markets stocks belong, at least in some proportion, in most investors' portfolios. Emerging markets stocks, while highly volatile and risky, are a big part of creating a diversified portfolio. Investors tend to focus on the poor performance of emerging markets stocks the past five years. They forget how emerging markets stocks can often zig when U.S. markets zag.

But emerging markets are highly speculative. The average annual return of emerging markets stocks at 12.8% beats the 10% average of the U.S., says Index Fund Advisors. But emerging markets are also among the riskiest stocks investors can buy, coming in more two-and-a-half times riskier than U.S. stocks.

The key is to diversify your emerging markets holdings. The Vanguard Emerging Markets Stock index, for instance, hold 9.5% of its assets in emerging Europe, including Russia, Morningstar says. But 19% of the assets are in Latin America, 11% in Africa and 45% in emerging Asia. By diversifying, investors can stay in emerging markets and not worry too much about events with Russia.